1H23 was profitable, thanks to both increased underwriting profits and investment returns.
The total premium growth target for 2023 was raised from 15-20% to 20-30%.
The “buy” rating was reaffirmed and the target price was lowered to HK$31.30 (corresponding to 1.4 times P/NEP 2024).
The English version of this Hong Kong Stock Connect Report was published by Huaxing Securities (Hong Kong) at 6:00 a.m. on September 1, 2023. The Chinese version was reviewed by Xu Haohan of Huaxing Securities (Securities Analyst Registration Number: S1680520080002). If you would like to further discuss the views expressed in this report, please contact your Huaxing Securities sales representative.
1H23 underwriting profits increased further, and investment returns were corrected. Zhongan Online's net profit of 1H23 reached HK$211 million (loss of HK$636 million compared to 1H22), which is in line with the positive profit forecast previously issued by the company, but fell short of our expectations due to exchange losses. The improvement in net profit was mainly due to an increase in underwritten profit (up 35% year on year) and an improvement in investment returns, both of which offset exchange losses due to the depreciation of the RMB against the US dollar. Zhongan Online's core business has remained steady. 1H23 achieved total premiums of RMB 145 billion (up 37.5% year on year), mainly due to the overall growth of various ecosystems. Premium revenue from vertical fields such as automobiles/digital lifestyle/consumer finance/health increased 54.3%/52.8%/52%/15.9% year-on-year, with premium contribution rates of 6%/40%/19%/35%, respectively. The comprehensive cost ratio for 1H23 underwriting was further optimized from 96.5% of 1H22 to 95.8%, mainly due to a 0.6 percentage point year-on-year decrease in the payout rate and a 0.1 percentage point year-on-year decrease in the cost rate.
The second half of the year focused on increasing underwriting profits and maintaining a prudent strategy for the consumer finance ecosystem. Due to strong demand from various ecosystems, Zhongan Online achieved premium revenue of 3.3 billion yuan in July, an increase of 35.3% over the previous year. Management raised the total premium growth target for 2023 from 15-20% to 20-30%. Premium growth is expected to slow in the second half of the year, mainly because the premium growth rate of the consumer finance ecosystem will slow down, because Zhongan Online is taking a cautious approach to this line considering the current macroeconomic situation, and is also focusing on further optimizing the comprehensive cost ratio to increase underwriting profits. As premium revenue from self-operated channels continues to grow (1H23 accounts for 30.6% of total premiums, up 8.6 percentage points from the previous year), the high user renewal rate (1H23 increased from 85% in 2022 to 87.3%) has further driven an increase in average revenue per user (ARPU) while driving a further decline in channel fees. Furthermore, considering improvements in underwriting profits and return on investment, we expect 2H23's net profit to reach RMB 818 million, compared to a loss of RMB 734 million compared to 2H22.
Model update: We lowered our 2023 net profit forecast by 19% to reflect exchange losses. We raised our net profit forecast for 2024/25 by 1%/2% to reflect: 1) a 7%/7% increase in the total premium income forecast; 2) a 5.0/5.2 percentage point reduction in the expense rate forecast, both of which are expected to offset the impact of the 1.8/1.9 percentage point increase in the payout rate forecast.
Reiterating the “buy” rating, the target price was lowered to HK$31.30 (previously, the target price for SOTP was HK$38.70). Following the adjustment of the shareholding structure by Zhongan Online, we now use the P/NEP method to value it (previously the SOTP method). We switched the valuation base year to 2024 and gave a target P/NEP multiple of 1.4 times (previously we gave the insurance business a target multiple of 1.8 times in the SOTP valuation method). We also adjusted our exchange rate assumptions and predicted a compound annual growth rate of 13.7% for net premiums earned in 2023-25, resulting in a new target price of HK$31.30. Risk warning: Health insurance premiums are growing slower than expected; competition in the mid-tier medical insurance market is intensifying; the investment environment is weak.